Optimal Prices and Inventories Decisions on Returns Policy with Practical Examples Thorough a Stackelberg Game

Kuo-Hsien Wang (), Yu-Je Lee () and Che-Tsung Tung ()
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Kuo-Hsien Wang: Takming University of Science and Technology
Yu-Je Lee: Takming University of Science and Technology
Che-Tsung Tung: Takming University of Science and Technology

International Journal of Academic Research in Accounting, Finance and Management Sciences, 2013, vol. 3, issue 2, 66-77

Abstract: This study explores a Stackelberg game that consists of a manufacturer who is a leader manufacturing newsvendor-type products, and two retailers who are two followers selling the products in a stochastic demand market that is divided into two various prices sub-markets allowing demand leakage from a high-priced market to a low-priced market. The objective of the game is that the manufacturer offers a returns policy contract in an effort that not only to maximize its expected profit by determining wholesale price and buy-back price, but also to improve the two retailers’ expected profits by determining their prices and order sizes. We develop a simple solution procedure to the case of uniformly distributed demand, and thereby conduct a string of examples incorporating with the factors of demand leakage rate, consumers’ price-sensitivity and demand variability. Many significant contributions of this study include: the chain should give up some sales opportunity in high price-sensitive markets and then offset back from low price-sensitive ones; the two retailers jointly bear the entire risk of demand uncertainty; and the returns policy contract indeed outperforms a price-only contract although it is not the Pareto improvement to low-priced market segment.

Keywords: Inventory; Newsvendor; Returns policy; Demand uncertainty; Stackelberg game (search for similar items in EconPapers)
Date: 2013
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